Strategy shift needed to drive development

Despite the high wealth levels currently being generated across a range of industries in Western Australia, many technology start-up firms are shutting up shop and looking elsewhere to secure funding.

One company looking elsewhere is Busselton-based Thumtronics Ltd, winner of the Western Australian Information Technology and Telecommunications Association’s 2005 award for innovation,

Thumtronics chief executive Jim Plamondon told WA Business News the company was currently in discussions with venture capitalists in the US to secure funding for the development of its new electronic musical instrument, the Thummer.

“We might have to move our offices overseas,” Mr Plamondon said.

Another WAITTA award winner, PIVoD Technologies founder Phillip Jenkins, says his company is targeting the nation’s east coast, and even overseas, in its search for investors.

“Just searching for such out-of-state investors is incredibly expensive and time consuming, which places a big extra cost on WA-based innovators,” he said. 

While there has been investment in high tech start-ups in Australia, figures relating to return on investment have revealed a lack of awareness among venture capitalists with regard to choosing the right innovation investments.

“From 1995 to 2005, the internal rate of return [IRR] was zero per cent return on investment in innovation in Australia. This compares to 41.4 per cent return per year in the United States,” Mr Plamondon said.

“At this IRR, Australia’s venture capitalist investments would have earned over a billion dollars, instead of nothing.”

According to Mr Plamondon, there needs to be a change of focus among venture capitalists towards what is called ‘disruptive’ innovations rather than ‘sustaining’ innovations.

“It’s primarily about funding new types of technology,” he said. 

“Disruptive innovations can create long-term competitive advantages, whereas sustaining innovations merely improve an existing technology, which may once have been disruptive.”

He said the theory of disruptive innovation had been widely accepted in the US to help predict the commercial success of small, innovative firms by reducing risk of investing in start-ups and increases return on investment. 

“The problem is that venture capitalists can’t identify disruptive innovation in Australia,” Mr Plamondon said.“It really is a private equity problem and a question of organisation to get those people with money into innovation.

But John Hassen, managing director of ShieldLiner Ltd, which develops pipe relining and rehabilitation technologies, said the onus should also be placed on the inventors in regards to accessing capital.

“I think a lot have inventors syndrome...they want people to throw them money and yet they really don’t have much to show for it,” he said.

“Basically if you can’t get a Comet grant or if you can’t convince people of getting a project to that stage then it’s probably not worth it.

“An inventor who is able to document things and able to complete a cash flow is half the way there.”

So what should be done to get sophisticated investors on board the high tech start-up bandwagon?

According to Ernst and Young’s Perth office entrepreneurial growth markets partner, Grant Burgess, the state needs a new pooled development fund that pools the high-risk capital of WA’s sophisticated investors and invests it in start-up companies that have the best chance of profiting from it.

“This fund could help keep these companies, their jobs and their future profits here in WA, while providing tax savings to its investors,” Mr Burgess told WA Business News. 

Meanwhile, the state government is doing its bit to assist in bringing innovators and venture capitalists together with the Edge Global Conference.

An initiative of the Department of Industry and Resources to be held in May 2007, the conference seeks to support innovators and emerging industries to gain better access to capital and support networks, and to assist them in the commercialisation of their projects.